Move to weaken currency too late, says top US bank

LAST week’s move by the Monetary Authority of Singapore (MAS) to weaken the Singapore dollar to spur economic growth came too late, says leading US investment bank Citigroup. 

In a hard-hitting report, analyst Cliff Tan said: “The MAS choice of staying neutral in the first half (of the year) was in hindsight probably a mistake.” 

He said a dramatic shrinking of the economy by 11.8% in the April to June quarter compared to the previous quarter could “probably” have been moderated by earlier MAS action. 

Last Thursday, the MAS, the country’s central bank, lowered the band in which the Singapore dollar is allowed to trade. 

A move to allow the weakening of the local currency can spur growth because, for example, exports become cheaper for foreign buyers. 

Also last Thursday, the Trade and Industry Ministry said Singapore’s economy shrank 4.3% in the second quarter, compared to a year ago.  

An 11.8% quarter-on-quarter contraction was its worst-ever performance.  

Tan said it was clear by mid-April that SARS was set to have a big impact on the economy. 

“Monetary easing would not have forestalled a negative (economic growth) reading, but it would have lopped off some of the downside if MAS had acted sooner,” he said. 

But the MAS’ inaction before last week led the market to think that the central bank believed the economy was better than it actually was, he added.  

Even the most pessimistic economists were caught off-guard by the severity of the economy’s contraction in the second quarter. Many see the monetary easing as the MAS “taking out insurance” against any further weakening of the local economy. 

But some agree with Citigroup that the MAS could have acted sooner. 

UOB economist Jimmy Koh said: “It was too late, since it takes time for monetary policy to work through the economy.” 

But it is still good news that the MAS now seems more willing to use the exchange rate as a policy tool, he added. – The Straits Times/Asia News Network  

For another perspective from The Straits Times, a partner of Asia News Network, click here.

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